Ten years ago, corn and soybean prices would be in the winter doldrums during the month of February, with many traders taking an extended vacation. Now with increased fund participation and the growing importance of South American corn, soybean and cotton production, February has become an important month.
The last few years this has also been a key change-of-trend month. In other words, if prices rally into February, be prepared to sell. If prices collapse in February, it often sets up a good low-risk time to buy.
These are three factors to watch during the month:
Weather in South America is the most important fundamental to watch. The current projections call for a soybean crop of 59 million metric tons (MMT) out of Brazil, which is up about 8 MMT from last year. The soybean crop in Argentina is projected to be at 42 MMT, down 1-2 MMT from earlier projections because dry weather has hurt yield potential. By the middle of February, you'll have a better idea of the actual crop size in South America.
Commodity fund participation will continue to move the corn and soybean markets. These funds created higher prices early in 2006 as funds aggressively bought commodities across the entire board of trade. Because the funds have to eventually sell back these purchases, it's not long-term bullish. The only certainty is that with more fund participation, volatility will increase.
Chinese and Southeast Asian demand is uncertain at this time. China's soybean buying has dropped from last year. Is that demand back-loaded, or will they just buy less this year? Will bird flu take a toll on feed grain demand? As we enter the first quarter of 2006, we'll be able to answer these fundamental questions.
Here are three chart signals I'll watch to determine if prices are putting in a high or low in the month of February:
Watch the January high and low on the soybean weekly continuation chart. If prices can close above the January high in February, it will suggest an additional rally into the March-May time period. If prices close below the January low in February, it will suggest lower prices into early March.
Watch the price action in early February. I have several time counts that suggest a lot of volatility and a potential high or low during the month of February. In 2005 prices put in a major low on Feb. 4 with prices marching higher into the May-June seasonal peak.
The six- to seven-month price cycle is obvious in the soybean market since the October 2001 low. If prices rally during the month of February, I'll make additional old- and new-crop sales. If prices drop lower into late February it may be an ideal time for livestock feeders to buy corn and soybean meal.
Be a disciplined scale-up seller of old- and new-crop soybeans if prices rally up to new highs in February.
For livestock feeders, late February is often the ideal time to get spring and summer feed needs locked in.
Most farmers I work with are 100% sold out of cash soybeans and are holding May call options or call spreads. If soybean prices rally during the month of February, I'll cash in the profits on those long positions. If prices set back, I'll buy additional calls on that weakness.
Write out your plan and stick with it.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: aginvestor@agmotion.com.